<PAGE>
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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                            ------------------------

                                   FORM 10-Q

                QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

<TABLE>
<S>                                            <C>
   For the quarter ended DECEMBER 31, 1999           Commission file number 000-25709
</TABLE>

                            ------------------------

                                   ETOYS INC.

             (Exact name of registrant as specified in its charter)

<TABLE>
<S>                                            <C>
           DELAWARE                                  95-4633006
 (State or other jurisdiction                     (I.R.S. Employer
              of                                Identification No.)
incorporation or organization)
</TABLE>

                        3100 OCEAN PARK BLVD., SUITE 300
                         SANTA MONICA, CALIFORNIA 90405
               (Address of principal executive offices, zip code)

       Registrant's telephone number, including area code: (310) 664-8100

                            ------------------------

    Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/  No / /

120,577,912 shares of $0.0001 par value common stock outstanding as of January
31, 2000

                                  Page 1 of 35
                            Exhibit Index on Page 35

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
                                   ETOYS INC.

                                   FORM 10-Q

                    FOR THE QUARTER ENDED DECEMBER 31, 1999

                                     INDEX

<TABLE>
<CAPTION>
                                                                PAGE
                                                              --------
<S>                                                           <C>
PART I--FINANCIAL INFORMATION
  Item 1. Consolidated Financial Statements.................      3
  Item 2. Management's Discussion and Analysis of Financial
        Condition and Results of Operations.................     11
  Item 3. Quantitative and Qualitative Disclosures About
        Market Risk.........................................     32

PART II--OTHER INFORMATION
  Item 1. Legal Proceedings.................................     33
  Item 2. Changes in Securities and Use of Proceeds.........     33
  Item 3. Defaults upon Senior Securities...................     33
  Item 4. Submission of Matters to a Vote of Security
        Holders.............................................     33
  Item 5. Other Information.................................     33
  Item 6. Exhibits and Reports on Form 8-K..................     33

Signatures..................................................     34
Exhibit Index...............................................     35
</TABLE>

                                       2
<PAGE>
PART I--FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

                                   ETOYS INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS

                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                         QUARTER ENDED           NINE MONTHS ENDED
                                                         DECEMBER 31,               DECEMBER 31,
                                                   -------------------------   ----------------------
                                                      1999          1998          1999         1998
                                                   -----------   -----------   -----------   --------
                                                   (UNAUDITED)   (UNAUDITED)   (UNAUDITED)
<S>                                                <C>           <C>           <C>           <C>
Net sales........................................    $106,751      $22,910      $ 128,032    $ 23,900
Cost of sales....................................      86,467       18,201        103,676      19,008
                                                     --------      -------      ---------    --------
Gross profit.....................................      20,284        4,709         24,356       4,892
Operating expenses:
  Marketing and sales............................      66,017       10,611         97,602      14,354
  Product development............................      13,596          905         30,619       2,006
  General and administrative.....................       4,002        1,590         11,256       2,483
  Goodwill amortization..........................       9,532           80         19,158         239
  Deferred compensation amortization.............       3,495        1,510         10,591       1,623
                                                     --------      -------      ---------    --------
    Total operating expenses.....................      96,642       14,696        169,226      20,705
                                                     --------      -------      ---------    --------
Operating loss...................................     (76,358)      (9,987)      (144,870)    (15,813)
Interest income, net.............................         871          166          3,657         439
Provision for taxes..............................          --           (1)            (1)         (1)
                                                     --------      -------      ---------    --------
Net loss.........................................    $(75,487)     $(9,822)     $(141,214)   $(15,375)
                                                     ========      =======      =========    ========
Basic net loss per equivalent share..............    $  (0.63)     $ (0.29)     $   (1.39)   $  (0.46)
                                                     ========      =======      =========    ========
Pro forma basic net loss per equivalent share....    $  (0.63)     $ (0.11)     $   (1.26)   $  (0.19)
                                                     ========      =======      =========    ========
Shares used in computation of basic net loss per
  equivalent share (1)...........................     119,716       33,731        101,944      33,157
                                                     ========      =======      =========    ========
Shares used to compute pro forma basic net loss
  per equivalent share (2).......................     119,716       88,469        112,455      79,287
                                                     ========      =======      =========    ========
</TABLE>

------------------------

(1) Includes shares associated with the Redeemable Convertible Preferred Stock
    effective as of the closing of the Company's initial public offering. See
    Note 6 to the Consolidated Financial Statements.

(2) Includes shares associated with the Redeemable Convertible Preferred Stock
    as if such conversion occurred on April 1, 1998, or at the date of original
    issuance, if later. See Note 6 to the Consolidated Financial Statements.

                            See accompanying notes.

                                       3
<PAGE>
                                   ETOYS INC.

                          CONSOLIDATED BALANCE SHEETS

                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                              DECEMBER 31,    MARCH 31,
                                                                  1999          1999
                                                              -------------   ---------
                                                               (UNAUDITED)
<S>                                                           <C>             <C>
ASSETS
Current assets:
  Cash and cash equivalents.................................    $ 219,929     $ 20,173
  Inventories...............................................       62,014        5,067
  Prepaids and other current assets.........................       14,506        1,577
                                                                ---------     --------
Total current assets........................................      296,449       26,817
Property and equipment......................................       42,399        2,505
  Accumulated depreciation and amortization.................       (3,882)        (369)
                                                                ---------     --------
                                                                   38,517        2,136
Goodwill (net of accumulated amortization of $19,462 and
  $319 at December 31, 1999 and March 31, 1999,
  respectively).............................................      170,534          637
Other assets................................................        8,190        1,076
                                                                ---------     --------
Total assets................................................    $ 513,690     $ 30,666
                                                                =========     ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable..........................................    $  81,718     $  4,236
  Accrued expenses..........................................        8,938          530
  Current portion of long-term notes payable and capital
    lease obligations.......................................        4,266          230
                                                                ---------     --------
Total current liabilities...................................       94,922        4,996
Long-term notes payable and capital lease obligations.......        7,656          477
Long-term convertible subordinated notes....................      150,000           --
Redeemable Convertible Preferred Stock, 19,593,089 shares
  authorized:
  Series A Preferred Stock; $.0001 par value; none and
    7,023,645 shares issued and outstanding at December 31,
    1999 and March 31, 1999, respectively...................           --        4,355
  Series B Preferred Stock; $.0001 par value; none and
    11,886,649 shares issued and outstanding at December 31,
    1999 and March 31, 1999, respectively...................           --       24,952
  Series C Preferred Stock; $.0001 par value; none and
    666,666 shares issued and outstanding at December 31,
    1999 and March 31, 1999, respectively...................           --       19,984
Commitments and contingencies
Stockholders' equity:
  Common stock; $.0001 par value, 600,000,000 shares
    authorized; 119,591,045 and 34,535,415 issued and
    outstanding at December 31, 1999 and March 31, 1999,
    respectively............................................           12            3
  Additional paid-in-capital................................      476,659       45,837
  Receivables from stockholders.............................       (1,862)        (138)
  Deferred compensation.....................................      (41,511)     (38,974)
  Accumulated other comprehensive loss......................         (146)          --
  Accumulated deficit.......................................     (172,040)     (30,826)
                                                                ---------     --------
Total stockholders' equity (deficit)........................      261,112      (24,098)
                                                                ---------     --------
Total liabilities and stockholders' equity..................    $ 513,690     $ 30,666
                                                                =========     ========
</TABLE>

                            See accompanying notes.

                                       4
<PAGE>
                                   ETOYS INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                NINE MONTHS ENDED
                                                                   DECEMBER 31,
                                                              ----------------------
                                                                 1999         1998
                                                              -----------   --------
                                                              (UNAUDITED)
<S>                                                           <C>           <C>
OPERATING ACTIVITIES
Net loss....................................................   $(141,214)   $(15,375)
Adjustments to reconcile net loss to net cash used in
  operating activities:
  Noncash interest..........................................          --          38
  Depreciation..............................................       3,305         246
  Amortization of intangibles...............................      19,645         239
  Deferred compensation amortization related to stock
    options.................................................      10,591       1,621
  Other, net................................................         145          --
  Changes in operating assets and liabilities:
    Inventories.............................................     (55,327)     (4,747)
    Prepaids and other current assets.......................     (11,123)       (359)
    Accounts payable........................................      74,907      11,968
    Accrued expenses........................................       4,119       1,446
                                                               ---------    --------
Net cash used in operations.................................     (94,952)     (4,923)
INVESTING ACTIVITIES
Capital expenditures for property and equipment.............     (28,274)     (1,913)
Proceeds from the sale of property and equipment............       2,564          --
Net cash received from acquisition of BabyCenter, net of
  acquisition costs.........................................       2,571          --
Other, net..................................................      (2,738)     (1,022)
                                                               ---------    --------
Net cash used in investing activities.......................     (25,877)     (2,935)
FINANCING ACTIVITIES
Proceeds from bridge loan...................................          --       5,000
Payments on bridge loan.....................................          --      (2,238)
Proceeds from the issuance of convertible subordinated
  notes.....................................................     150,000          --
Debt financing costs........................................      (4,810)         --
Proceeds from issuance of Redeemable Convertible Preferred
  Stock.....................................................          --      22,077
Proceeds from issuance of common stock and exercise of stock
  options...................................................     177,632           4
Payments on notes payable and capital leases................      (2,229)        (15)
Proceeds from receivables from stockholders.................         138          23
                                                               ---------    --------
Net cash provided by financing activities...................     320,731      24,851
Effect of foreign exchange rate changes on cash.............        (146)         --
                                                               ---------    --------
Net increase in cash and cash equivalents...................     199,756      16,993
Cash and cash equivalents at beginning of period............      20,173       1,552
                                                               ---------    --------
Cash and cash equivalents at end of period..................   $ 219,929    $ 18,545
                                                               =========    ========
Supplemental disclosures:
  Interest paid.............................................   $     359    $      8
  Notes payable and capital lease obligations incurred......   $  11,434    $     75
  Acquisition of BabyCenter:
    Fair value of assets acquired (including goodwill)......   $ 197,634    $     --
    Liabilities assumed.....................................      (9,017)         --
    Stock issued............................................    (189,987)         --
    Assumption of stockholders' receivables.................       1,862          --
                                                               ---------    --------
    Cash paid...............................................         492          --
    Cash acquired...........................................      (3,063)         --
                                                               ---------    --------
  Net cash received from acquisition of BabyCenter..........   $   2,571    $     --
                                                               =========    ========
</TABLE>

                            See accompanying notes.

                                       5
<PAGE>
                                   ETOYS INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  (UNAUDITED)

NOTE 1 -- ACCOUNTING POLICIES

UNAUDITED INTERIM FINANCIAL INFORMATION

    The consolidated financial statements as of December 31, 1999 have been
prepared by eToys Inc. ("the Company") pursuant to the rules and regulations of
the Securities and Exchange Commission (the "SEC"). These statements are
unaudited and, in the opinion of management, include all adjustments (consisting
of normal recurring adjustments and accruals) necessary to present fairly the
results for the periods presented. The balance sheet at March 31, 1999 and the
consolidated statement of operations and consolidated statement of cash flows
for the nine months ended December 31, 1998 have been derived from the audited
financial statements at those dates. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted pursuant to such
SEC rules and regulations. Operating results for the quarter and nine months
ended December 31, 1999 are not necessarily indicative of the results that may
be expected for the fiscal year ending March 31, 2000. These consolidated
financial statements should be read in conjunction with the audited financial
statements and the accompanying notes included in the Company's Form S-1
Registration Statement declared effective May 19, 1999 (the "S-1").

    Certain prior-period balances have been reclassified to conform to the
current-period presentation.

CASH AND CASH EQUIVALENTS

    All highly liquid investments with maturities of three months or less at the
date of purchase are considered to be cash equivalents and are carried at cost
plus accrued interest, which approximates fair value. Interest income was $1.8
million and $0.2 million for the quarters ended December 31, 1999 and 1998,
respectively, and $4.7 million and $0.5 million for the nine months ended
December 31, 1999 and 1998, respectively, and is included within interest
income, net, in the accompanying consolidated statements of operations.

PRINCIPLES OF CONSOLIDATION

    The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.

FOREIGN CURRENCY TRANSLATION

    The functional currency of the Company's foreign subsidiary is the local
currency. Assets and liabilities of the foreign subsidiary are translated into
U.S. dollars at the period end exchange rates, and revenues and expenses are
translated at average rates prevailing during the periods presented. Translated
adjustments are included in accumulated other comprehensive loss, a separate
component of stockholders' equity. Transaction gains or losses arising from
transactions denominated in a currency other than the functional currency of the
entity involved, which have been insignificant, are included in the consolidated
statements of operations.

USE OF ESTIMATES

    The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets

                                       6
<PAGE>
                                   ETOYS INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                                  (UNAUDITED)

NOTE 1 -- ACCOUNTING POLICIES (CONTINUED)

and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

COMPREHENSIVE LOSS

    As of April 1, 1999, the Company adopted Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income, which establishes standards
for the reporting and display of comprehensive loss and its components in the
financial statements. Comprehensive loss is composed of net loss and foreign
currency translation adjustments. Comprehensive loss was $75.6 million and $9.8
million for the quarters ended December 31, 1999 and 1998, respectively, and
$141.4 million and $15.4 million for the nine months ended December 31, 1999 and
1998, respectively.

NOTE 2 -- BABYCENTER ACQUISITION

    On July 1, 1999, the Company completed its acquisition of BabyCenter, Inc.
("BabyCenter") pursuant to a reorganization agreement executed in April 1999. As
consideration for the purchase, the Company issued to the stockholders of
BabyCenter approximately 16.0 million shares of the Company's common stock
valued at $190.0 million based upon the stock price as of the date that the
transaction was announced.

    The acquisition has been accounted for as a purchase and the acquisition
costs of $190.0 million have been allocated to the assets acquired and the
liabilities assumed based upon estimates of their respective fair values. A
total of $189.0 million, representing the excess of the purchase price over the
fair value of the net tangible assets acquired, has been allocated to intangible
assets and is being amortized over five years.

    The Company's consolidated results of operations incorporates BabyCenter's
results of operations commencing upon the July 1, 1999 acquisition date. The
unaudited pro forma combined information below presents the combined results of
operations of the Company as if the acquisition had occurred at the beginning of
the respective periods presented. The unaudited pro forma combined information,
based upon the historical consolidated financial statements of the Company and
BabyCenter, is based on an acquisition cost of $190.0 million and assumes that
an estimated $189.0 million excess of acquisition cost over the book value of
BabyCenter's net tangible assets is allocated to intangible assets with a useful
life of five years.

<TABLE>
<CAPTION>
                                                                    NINE MONTHS ENDED
                                                                       DECEMBER 31,
                                                                  ----------------------
                                                                    1999          1998
                                                                  --------      --------
                                                                   (IN MILLIONS, EXCEPT
                                                                    PER SHARE AMOUNTS)
<S>                                                               <C>           <C>
Revenues....................................................      $ 130.1        $ 27.1
Net loss....................................................      $(157.8)       $(45.0)
Net loss per share (1)......................................      $ (1.34)       $(0.47)
</TABLE>

------------------------

(1) Net loss per share excluding amortization of intangible assets and deferred
    compensation would be $(1.00) and $(0.15) for the nine months ended
    December 31, 1999 and 1998, respectively. Net loss

                                       7
<PAGE>
                                   ETOYS INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                                  (UNAUDITED)

NOTE 2 -- BABYCENTER ACQUISITION (CONTINUED)

    per share is calculated using the weighted average number of common shares
    outstanding, including the pro forma effects of the automatic conversion of
    the Company's Redeemable Convertible Preferred Stock and the issuance of
    approximately 16.0 million shares to stockholders of BabyCenter as if such
    events had occurred on April 1, 1998.

    The unaudited pro forma combined information is not necessarily indicative
of the results of operations of the combined company had the acquisition
occurred at the beginning of the periods presented, nor is it necessarily
indicative of future results.

NOTE 3 -- LONG-TERM CONVERTIBLE SUBORDINATED NOTES

    In December 1999, the Company issued $150 million principal amount of
6.25% convertible subordinated notes (the "Convertible Notes") due December 1,
2004. In connection with the issuance of the Convertible Notes, the Company
incurred financing costs of $4.8 million, resulting in net proceeds to the
Company of $145.2 million. The Convertible Notes are unsecured and are
subordinated to existing and future senior debt as defined in the indenture
pursuant to which the Convertible Notes were issued. The principal amount of the
Convertible Notes will be due on December 1, 2004 and will bear interest at an
annual rate of 6.25%, payable twice a year, on June 1 and December 1, beginning
June 1, 2000, until the principal amount of the Convertible Notes is fully
repaid. The Convertible Notes may be converted into the Company's common stock
at the option of the holder at any time prior to December 1, 2004, unless the
Convertible Notes have been previously redeemed or repurchased by the Company.
The conversion rate, subject to adjustment in certain circumstances, is 13.5323
shares of the Company's common stock for each $1,000 principal amount of the
Convertible Notes, which is equivalent to a conversion price of approximately
$73.90 per share. Additionally, on or after December 1, 2002, the Company may
redeem all or a portion of the Convertible Notes, that have not been previously
redeemed or repurchased, at any time at redemption prices set forth in the
indenture pursuant to which the Convertible Notes were issued, plus any accrued
and unpaid interest to the redemption date.

NOTE 4 -- STOCK SPLIT

    In March 1999, the Company's Board of Directors declared a stock split of
three shares for every one share of common stock then outstanding. The stock
split was effective May 24, 1999, the date the Company's public offering of
common stock closed. Accordingly, the accompanying financial statements and
footnotes have been restated to reflect the stock split. The par value of the
shares of common stock to be issued in connection with the stock split was
credited to common stock and a like amount charged to additional paid-in
capital.

NOTE 5 -- COMMITMENTS AND CONTINGENCIES

LEGAL PROCEEDINGS

    From time to time, the Company is subject to legal proceedings and claims in
the ordinary course of business, including employment related claims and claims
of alleged infringement of trademarks, copyrights and other intellectual
property rights. The Company currently is not aware of any such legal
proceedings or claims that it believes will have, individually or in the
aggregate, a material adverse effect on its business, prospects, financial
condition and operating results.

                                       8
<PAGE>
                                   ETOYS INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  (UNAUDITED)

NOTE 6 -- STOCKHOLDERS' EQUITY

    On May 24, 1999, the Company completed its initial public offering of
9,568,000 shares of its common stock. Net proceeds to the Company aggregated
$175.8 million. As of the closing date of the offering, all of the convertible
preferred stock outstanding was converted into an aggregate of 58,779,267 shares
of common stock.

NET LOSS PER SHARE

    Net loss per share is computed using the weighted average number of common
shares outstanding. Shares associated with stock options are not included
because they are antidilutive. The shares of Redeemable Convertible Preferred
Stock automatically converted into common stock effective upon the closing of
the Company's initial public offering and are included in the calculation of
weighted average number of shares as of that date.

PRO FORMA NET LOSS PER SHARE

    Pro forma net loss per share is computed using the weighted average number
of common shares outstanding, including the pro forma effects of the automatic
conversion of the Company's Redeemable Convertible Preferred Stock into shares
of the Company's common stock effective upon the closing of the Company's
initial public offering as if such conversion occurred on April 1, 1998, or at
the date of original issuance, if later.

    The following table sets forth the computation of basic and pro forma net
loss per share for the periods indicated (in thousands, except per share
amounts):

<TABLE>
<CAPTION>
                                                         QUARTER ENDED       NINE MONTHS ENDED
                                                         DECEMBER 31,           DECEMBER 31,
                                                      -------------------   --------------------
                                                        1999       1998       1999        1998
                                                      --------   --------   ---------   --------
<S>                                                   <C>        <C>        <C>         <C>
Numerator:
  Net loss--as reported.............................  $(75,487)  $ (9,822)  $(141,214)  $(15,375)
  Denominator:
  Weighted average shares...........................   119,716     33,731     101,944     33,157
                                                      --------   --------   ---------   --------
  Denominator for basic calculation.................   119,716     33,731     101,944     33,157
Weighted average effect of pro forma securities:
  Series A Redeemable Convertible Preferred Stock...        --     19,078       3,776     19,001
  Series B Redeemable Convertible Preferred Stock...        --     35,660       6,377     27,129
  Series C Redeemable Convertible Preferred Stock...        --         --         358         --
                                                      --------   --------   ---------   --------
  Denominator for pro forma calculation.............   119,716     88,469     112,455     79,287
                                                      ========   ========   =========   ========
Net loss per share:
  Basic.............................................  $  (0.63)  $  (0.29)  $   (1.39)  $  (0.46)
                                                      ========   ========   =========   ========
  Pro forma.........................................  $  (0.63)  $  (0.11)  $   (1.26)  $  (0.19)
                                                      ========   ========   =========   ========
</TABLE>

                                       9
<PAGE>
                                   ETOYS INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  (UNAUDITED)

NOTE 7 -- SUBSEQUENT EVENTS

    On January 18, 2000, BabyCenter Inc., a wholly-owned subsidiary of the
Company, completed its sale of substantially all of the assets and related
liabilities of its Consumer Health Interactive ("CHI") division. In connection
with the sale, the Company received proceeds in a combination of cash and
registrable securities of approximately $20.0 million. The net book value of
CHI's assets and related liabilities approximated the sale price of $20.0
million as of the date of sale.

    In February 2000, the Company filed a shelf registration statement with the
Securities and Exchange Commission covering resales of the $150 million of
Convertible Notes and common stock issuable upon conversion of the Convertible
Notes. This shelf registration statement has not as of yet become effective.

                                       10
<PAGE>
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
  OF OPERATIONS

    This Form 10-Q and the following "Management's Discussion and Analysis of
Financial Condition and Results of Operations" include "forward- looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. This Act provides a "safe harbor" for forward-looking statements to
encourage companies to provide prospective information about themselves so long
as they identify these statements as forward-looking and provide meaningful
cautionary statements identifying important factors that could cause actual
results to differ from the projected results. All statements other than
statements of historical fact made by us in this Form 10-Q are forward-looking.
In particular, the statements herein regarding industry prospects and our future
results of operations or financial position are forward-looking statements.
Forward-looking statements reflect our current expectations and are inherently
uncertain. Our actual results may differ significantly from our expectations,
and we assume no responsibility to update forward-looking statements made
herein. The section entitled "Additional Factors That May Affect Future Results"
describes some, but not all, of the factors that could cause these differences.

    The SEC is currently reviewing the financial statement classification of
distribution and fulfillment costs and other items by a number of e-commerce
companies, including eToys Inc. We define distribution and fulfillment costs as
primary recurring costs incurred for the operation of our distribution centers
and customer service centers and have classified such costs in marketing and
sales expenses. These costs are primarily composed of distribution facility
expenses, including equipment and supplies, payroll and travel expenses for
personnel engaged in distribution activities, and third-party fulfillment fees.
These costs represent the facility costs necessary for warehousing inventory as
well as costs incurred to pick and pack a customer order and the related
packaging supplies. The SEC may decide to require that certain distribution
center costs be classified as cost of sales. Should this occur, we will
reclassify any distribution and fulfillment costs as required and our gross
profit will be correspondingly affected. However, such reclassification will not
impact our sales, operating profit or loss, net profit or loss, or cash flows.

    Currently, the Emerging Issues Task Force (the "EITF") is deliberating
accounting for website development costs due to the lack of accounting guidance
regarding treatment of such costs incurred. We account for development costs in
accordance with Statement of Position 98-1 "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). We do not
anticipate that any change in the required accounting treatment of website
development costs will have a material impact on the financial statements.

RESULTS OF OPERATIONS

NET SALES

<TABLE>
<CAPTION>
                                    QUARTER ENDED                   NINE MONTHS ENDED
                                     DECEMBER 31,                      DECEMBER 31,
                                 --------------------              --------------------
                                   1999        1998     % CHANGE     1999        1998     % CHANGE
                                 ---------   --------   --------   ---------   --------   --------
                                    (IN THOUSANDS)                    (IN THOUSANDS)
<S>                              <C>         <C>        <C>        <C>         <C>        <C>
    Net sales..................  $ 106,751   $ 22,910     366%     $ 128,032   $ 23,900     436%
</TABLE>

    Net sales consist of product sales to customers and charges to customers for
outbound shipping and handling and gift-wrapping and are net of product returns,
discounts given and coupons. Growth in net sales for the quarter ended and nine
months ended December 31, 1999 versus the same periods in the prior year reflect
a significant increase in units sold due to the growth of our customer base
during the peak holiday shopping season, repeat purchases from our existing
customers, and growth in our non-toy categories of baby and book stores that
were launched this year. By the end of the quarter

                                       11
<PAGE>
ended December 31, 1999, our cumulative customer accounts reached 1.7 million
from 611,000 at September 30, 1999. Repeat customer purchases represented 34% of
orders placed in the quarter ended December 31, 1999.

GROSS PROFIT

<TABLE>
<CAPTION>
                                        QUARTER ENDED                  NINE MONTHS ENDED
                                        DECEMBER 31,                     DECEMBER 31,
                                     -------------------              -------------------
                                       1999       1998     % CHANGE     1999       1998     % CHANGE
                                     --------   --------   --------   --------   --------   --------
                                       (IN THOUSANDS)                   (IN THOUSANDS)
<S>                                  <C>        <C>        <C>        <C>        <C>        <C>
    Gross profit...................  $ 20,284   $ 4,709      331%     $ 24,356   $ 4,892      398%
</TABLE>

    Gross profit is net sales less the cost of sales, which consists of the cost
of products sold to customers, outbound and inbound shipping and handling costs,
and gift wrapping costs. Gross profit increased in absolute dollars for the
quarter ended and nine months ended December 31, 1999 as compared to the same
periods in the prior year, reflecting our increased sales volume. Gross profit
decreased as a percentage of sales by 1.6% and 1.5% for the quarter ended and
nine months ended December 31, 1999, respectively, as compared to the same
periods in the prior year. The decrease in gross profit as a percentage of sales
is primarily attributable to a shift in product mix towards lower-margin video
game and book products, combined with higher shipping and handling costs related
to customer orders during the 1999 peak holiday season, partially offset by
higher margins in our baby business. We believe that providing our customers
with superior customer service is an essential component of our business
strategy. Accordingly, we may incur additional costs in order to meet customer
expectations, which would impact gross profit. Over time, we intend to expand
our operations by adding new product categories and by expanding the breadth and
depth of our product or service offerings. Gross margins attributable to new
business areas may be lower than those associated with our existing business
activities.

MARKETING AND SALES

<TABLE>
<CAPTION>
                                      QUARTER ENDED                  NINE MONTHS ENDED
                                      DECEMBER 31,                     DECEMBER 31,
                                   -------------------              -------------------
                                     1999       1998     % CHANGE     1999       1998     % CHANGE
                                   --------   --------   --------   --------   --------   --------
                                     (IN THOUSANDS)                   (IN THOUSANDS)
<S>                                <C>        <C>        <C>        <C>        <C>        <C>
    Marketing and sales..........  $ 66,017   $ 10,611     522%     $ 97,602   $ 14,354     580%
</TABLE>

    Marketing and sales expenses consist primarily of advertising and
promotional expenditures, distribution facility expenses, including equipment
and supplies, and payroll and related expenses for personnel engaged in
marketing, customer service and distribution activities. Marketing and sales
expenses increased in absolute dollars and as a percentage of sales for the
quarter ended and nine months ended December 31, 1999 as compared to the same
periods in the prior year primarily due to increases in our advertising and
promotional expenditures during the peak holiday shopping season, increased
variable costs of fulfillment, customer service and credit card fees as a result
of increased sales volume, and additional costs incurred in the expansion of our
distribution facilities. We intend to continue to pursue an aggressive branding
and marketing campaign and, therefore, expect marketing and sales expenses to
increase significantly in absolute dollars in future periods. In addition, we
expect marketing and sales expenses to increase in absolute dollars as we expand
and refine our distribution facilities and operations to accommodate increases
in our sales volume. In February 2000, we agreed to terminate our relationship
with our third-party fulfillment company, Fingerhut Business Services, effective
March 31, 2000, after which we will rely solely on our own distribution centers
located in Virginia and Southern California, which are currently being developed
and enhanced. In cooperation with Fingerhut, we have commenced an orderly
transition of inventory from Fingerhut facilities to our own facilities, which
is expected to be completed in approximately three months. We expect to incur

                                       12
<PAGE>
expenses associated with this inventory transition, with the continued
development and enhancement of our own distribution operations and from our
efforts to meet customer expectations with respect to timely and accurate order
fulfillment.

PRODUCT DEVELOPMENT

<TABLE>
<CAPTION>
                                        QUARTER ENDED                  NINE MONTHS ENDED
                                        DECEMBER 31,                     DECEMBER 31,
                                     -------------------              -------------------
                                       1999       1998     % CHANGE     1999       1998     % CHANGE
                                     --------   --------   --------   --------   --------   --------
                                       (IN THOUSANDS)                   (IN THOUSANDS)
<S>                                  <C>        <C>        <C>        <C>        <C>        <C>
    Product development............  $ 13,596   $   905     1,402%    $ 30,619   $ 2,006     1,426%
</TABLE>

    Product development expenses consist primarily of payroll and related
expenses for merchandising, Web site development and information technology
personnel, Internet access and hosting charges and Web content and design
expenses. Product development expenses increased in absolute dollars and as a
percentage of sales for the quarter ended and nine months ended December 31,
1999 as compared to the same periods in the prior year. This increase was
primarily attributable to increased staffing and associated costs related to
enhancing the features, content and functionality of our Web site and
transaction-processing systems, as well as increased investment in systems and
telecommunications infrastructure. We believe that continued investment in
product development is critical to attaining our strategic objectives. In
addition to ongoing investments in our Web site stores and infrastructure, we
intend to increase investments in product, service and international expansion.
As a result, we expect product development expenses to increase in absolute
dollars.

GENERAL AND ADMINISTRATIVE

<TABLE>
<CAPTION>
                                        QUARTER ENDED                  NINE MONTHS ENDED
                                        DECEMBER 31,                     DECEMBER 31,
                                     -------------------              -------------------
                                       1999       1998     % CHANGE     1999       1998     % CHANGE
                                     --------   --------   --------   --------   --------   --------
                                       (IN THOUSANDS)                   (IN THOUSANDS)
<S>                                  <C>        <C>        <C>        <C>        <C>        <C>
    General and administrative.....  $  4,002   $ 1,590       152%    $ 11,256   $ 2,483       353%
</TABLE>

    General and administrative expenses consist of payroll and related expenses
for executive and administrative personnel, facilities expenses, professional
services expenses, travel and other general corporate expenses. The increase in
general and administrative expenses for the quarter ended and nine months ended
December 31, 1999 as compared to the same periods in the prior year was
primarily due to increased headcount and associated costs, legal and
professional fees, facilities and other related costs. Such expenses decreased
as a percentage of net sales for the quarter ended and nine months ended
December 31, 1999, as compared to the corresponding prior year periods, due to
the significant increase in net sales during such periods. We expect general and
administrative expenses to increase in absolute dollars as we expand our staff
and incur additional costs related to the growth of our business and
international expansion.

GOODWILL AND INTANGIBLE ASSETS

    Goodwill represents the excess of the purchase price over the fair value of
the net tangible assets acquired in a business combination. As a result of the
acquisition of BabyCenter, we recorded goodwill of approximately $189.0 million,
which is to be amortized over five years. As such, goodwill amortization for the
quarter ended and nine months ended December 31, 1999 of $9.5 million and $19.2
million, respectively, reflects goodwill amortization from the BabyCenter
purchase from the date of acquisition on July 1, 1999 as well as amortization of
goodwill recorded from a previous acquisition. In January 2000, we completed the
sale of substantially all of the assets and the related liabilities of
BabyCenter's Consumer Health Interactive division. As a result of the sale, we
expect that goodwill

                                       13
<PAGE>
amortization will decrease in future periods due to the reduction of goodwill
related to CHI. To the extent the amount of recorded goodwill is increased or we
do not generate additional sufficient cash flow to recover the amount of the
investment recorded, the investment may be considered impaired or be subject to
earlier write-off. In such event, the net loss in any given period could be
greater than anticipated and the market price of our stock could decline.

DEFERRED COMPENSATION

    In the nine months ended December 31, 1999, we recorded total deferred stock
compensation of $13.8 million in connection with stock options granted during
the period. Deferred stock compensation is amortized to expense over the vesting
periods of the applicable options, resulting in $3.5 million and $10.6 million
for the quarter ended and nine months ended December 31, 1999, respectively. We
expect to record $3.5 million of amortization over the remaining three months
ended March 31, 2000. These amounts represent the difference between the
exercise price of stock option grants and the deemed fair value of our common
stock at the time of such grants.

    Amortization of deferred compensation for each of the next four fiscal years
is expected to be as follows:

<TABLE>
<CAPTION>
                                                               AMOUNTS
                                                                 IN
YEAR ENDED                                                    THOUSANDS
----------                                                    ---------
<S>                                                           <C>
March 31, 2001..............................................   $13,975
March 31, 2002..............................................    13,969
March 31, 2003..............................................     9,798
March 31, 2004..............................................       276
</TABLE>

INTEREST INCOME AND EXPENSE

<TABLE>
<CAPTION>
                                                                                   NINE MONTHS
                                                 QUARTER ENDED                        ENDED
                                                 DECEMBER 31,                     DECEMBER 31,
                                              -------------------              -------------------
                                                1999       1998     % CHANGE     1999       1998     % CHANGE
                                              --------   --------   --------   --------   --------   --------
                                                (IN THOUSANDS)                   (IN THOUSANDS)
<S>                                           <C>        <C>        <C>        <C>        <C>        <C>
    Interest income.........................   $1,760      $168         948%    $4,726      $485        874%
    Interest expense........................   $  889      $  2      44,350%    $1,069      $ 46      2,224%
</TABLE>

    Interest income consists of earnings on our cash and cash equivalents.
Interest income increased for the quarter ended and nine months ended December
31, 1999 as compared to the corresponding prior year periods due to higher cash
balances resulting from the proceeds of our initial public offering of common
stock and proceeds from the issuance of $150 million of Convertible Notes.
Interest expense consists primarily of interest from the issuance of the
Convertible Notes, the amortization of debt financing costs related to the
Convertible Notes as well as interest on asset acquisitions financed through
notes payable and capital leases. Interest expense for the quarter ended and
nine months ended December 31, 1999 increased as compared to the corresponding
prior year periods due to interest on the Convertible Notes and additional asset
acquisitions financed through notes payable and capital lease obligations.
Interest expense is expected to increase in future periods as subsequent
quarters will include a full three months of interest expense for the
Convertible Notes.

INCOME TAXES

    We have not generated any taxable income to date and therefore have not paid
any federal income taxes since inception. Utilization of our net operating loss
carryforwards, which begin to expire in 2012, may be subject to certain
limitations under Section 382 of the Internal Revenue Code of 1986, as

                                       14
<PAGE>
amended. We have provided a full valuation allowance on the deferred tax asset,
consisting primarily of net operating loss carryforwards, because of uncertainty
regarding its realizability.

LIQUIDITY AND CAPITAL RESOURCES

    At December 31, 1999, the Company's principal source of liquidity consisted
of $219.9 million of cash and cash equivalents compared to $20.2 million of cash
and cash equivalents at March 31, 1999.

    Net cash used in operating activities was $95.0 million and $4.9 million for
the nine months ended December 31, 1999 and 1998, respectively. Net operating
cash flows were primarily attributable to net losses, reduced by noncash charges
of depreciation and amortization, as well as increases in inventories, prepaid
expenses and other, which were offset by increases in accounts payable and
accrued expenses.

    Net cash used in investing activities was $25.9 million for the nine months
ended December 31, 1999 and consisted of purchases of fixed assets and other
assets, partially offset by proceeds from the sale of fixed assets and cash
received from the acquisition of BabyCenter. Cash available for investment
purposes increased substantially in 1999 as a result of the proceeds from the
issuance of common stock in our initial public offering and proceeds from the
issuance of the Convertible Notes. Net cash used in investing activities for the
nine months ended December 31, 1998 was $2.9 million and consisted of purchases
of fixed assets and other assets.

    Net cash provided by financing activities of $320.7 million for the nine
months ended December 31, 1999 resulted from net proceeds from issuance of
common stock in our initial public offering and proceeds from the issuance of
the Convertible Notes, offset by debt financing costs incurred as a result of
the issuance of the Convertible Notes and payments on notes payable and capital
leases. Net cash provided by financing activities for the nine months ended
December 31, 1998 was $24.9 million and resulted from net proceeds from the
issuance of redeemable convertible preferred stock and proceeds from bridge loan
financing, offset by payments on the bridge loan.

    As of December 31, 1999, our principal commitments consisted of the
Convertible Notes outstanding combined with notes payable and capital lease
obligations incurred to finance fixed asset acquisitions. The Convertible Notes,
issued in December 1999, are unsecured and are subordinated to our existing and
future senior debt as defined in the indenture pursuant to which the Convertible
Notes were issued. The principal amount of the notes will be due on December 1,
2004 and will bear interest at an annual rate of 6.25%, payable twice a year, on
June 1 and December 1, beginning June 1, 2000, until the principal amount of the
Convertible Notes is fully repaid. The Convertible Notes may be converted into
our common stock at the option of the holder at any time prior to December 1,
2004, unless the Convertible Notes have been previously redeemed or repurchased
by us. The conversion rate, subject to adjustment in certain circumstances, is
13.5323 shares of our common stock for each $1,000 principal amount of
Convertible Notes, which is equivalent to a conversion price of approximately
$73.90 per share. Additionally, on or after December 1, 2002, we may redeem all
or a portion of the Convertible Notes, that have not been previously redeemed or
repurchased, at any time at redemption prices set forth in the indenture
pursuant to which the Convertible Notes were issued, plus any accrued and unpaid
interest to the redemption date.

    In December 1999, we entered into an eleven year lease agreement to relocate
our corporate offices. The lease begins in October 2000. In connection with the
lease commitment, we delivered a letter of credit to the lessor in the amount of
$7.5 million, which we have cash collateralized. Additionally, pursuant to the
lease agreement, we will deliver a second letter of credit in April 2000 in the
amount of $7.5 million, which we will also cash collateralize. The letters of
credit will be held as security during the initial lease term.

                                       15
<PAGE>
    We believe that current cash and cash equivalents and cash that may be
generated from operations will be sufficient to meet our anticipated cash needs
through December 31, 2000. However, any projections of future cash needs and
cash flows are subject to substantial uncertainty. If current cash, cash
equivalents and cash that may be generated from operations are insufficient to
satisfy our liquidity requirements, we will likely seek to sell additional
equity or debt securities or to obtain a line of credit. The sale of additional
equity or equity-related securities could result in additional dilution to our
stockholders. In addition, we will, from time to time, consider the acquisition
of or investment in complementary businesses, products, services and
technologies, which might impact our liquidity requirements or cause us to issue
additional equity or debt securities. There can be no assurance that financing
will be available in amounts or on terms acceptable to us, if at all.

YEAR 2000 IMPLICATIONS

    Many existing computer programs use only two digits to identify a year.
These programs were designed and developed without addressing the impact of the
recent change to the year 2000. As of the date of this filing, we have not
incurred business disruptions as a result of year 2000 issues. However, while no
such occurrence has developed, year 2000 issues may not become apparent
immediately and may therefore be experienced in the future. We continue to use
software, computer technology and other services that could potentially fail due
to year 2000 issues that have not yet become apparent.

    We have reviewed the year 2000 compliance of our internally developed
proprietary software. Our review has included testing to determine how systems
will function beyond the year 2000. Since inception, we have internally
developed substantially all of the systems for the operation of our Web site.
These systems include the software used to provide the Web site's search,
customer interaction, and transaction-processing and distribution functions, as
well as monitoring and back-up capabilities. Based upon our assessment to date,
we believe that our internally developed proprietary software is year 2000
compliant, although there can be no assurance in this regard.

    We have assessed the year 2000 readiness of our third-party supplied
software, computer technology and other services, which include software for use
in our accounting, database and security systems. The failure of such software
or systems to be year 2000 compliant could have a material negative impact on
the accounting functions and the operation of the Web site. As part of our
assessment of the year 2000 compliance of these systems, we sought assurances
from these vendors that their software, computer technology and other services
are year 2000 compliant. Based upon the results of our assessment, we believe
that our third-party supplied software, computer technology and other services
are year 2000 compliant, although there can be no assurance in this regard.

    Any failure of material systems, vendors' material systems or the Internet
to be year 2000 compliant could have material adverse consequences. Such
consequences could include difficulties in operating the Web site effectively,
taking product orders, making product deliveries or conducting other fundamental
parts of our business.

ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS

    In addition to the factors discussed in the "Overview" and "Liquidity and
Capital Resources" sections of this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and in the Company's S-1, the
following additional risk factors may affect the Company's future results.

OUR LIMITED OPERATING HISTORY MAKES FUTURE FORECASTING DIFFICULT.

    We were incorporated in November 1996. We began selling products on our Web
site in October 1997. As a result of our limited operating history, it is
difficult to accurately forecast our net sales and we have limited meaningful
historical financial data upon which to base planned operating

                                       16
<PAGE>
expenses. We base our current and future expense levels on our operating plans
and estimates of future net sales, and our expenses are to a large extent fixed.
Sales and operating results are difficult to forecast because they generally
depend on the volume and timing of the orders we receive. As a result, we may be
unable to adjust our spending in a timely manner to compensate for any
unexpected revenue shortfall. This inability could cause our net losses in a
given quarter to be greater than expected.

WE ANTICIPATE FUTURE LOSSES AND NEGATIVE CASH FLOW.

    We expect operating losses and negative cash flow to continue for the
foreseeable future. We anticipate our losses will increase significantly from
current levels because we expect to incur additional costs and expenses related
to:

    - brand development, marketing and other promotional activities;

    - the expansion of our inventory management and distribution operations and
      the termination of our reliance on third-party vendors for order
      fulfillment operations;

    - the continued development of our Web site and consumer-driven technology,
      transaction processing systems and our computer network;

    - the expansion of our product offerings and Web site content;

    - development of relationships with strategic business partners; and

    - international expansion of our operations.

    As of December 31, 1999, we had an accumulated deficit of $172.0 million. We
incurred net losses of $75.5 million and $141.2 million for the quarter ended
and nine months ended December 31, 1999, respectively.

    In addition, because of our acquisition of BabyCenter, we expect that our
losses will increase even more significantly because of additional costs and
expenses related to:

    - an increase in the number of employees;

    - an increase in sales and marketing activities;

    - an increase in Web site development activities and associated content;

    - additional facilities and infrastructure; and

    - assimilation of operations and personnel.

    Also, as a result of our acquisition of BabyCenter, we have recorded a
significant amount of goodwill, the amortization of which will significantly
reduce our earnings and profitability for the foreseeable future. The recorded
goodwill of approximately $189.0 million is being amortized over a five-year
period. To the extent we do not generate sufficient cash flow to recover the
amount of the investment recorded, the investment may be considered impaired and
could be subject to earlier write-off. In such event, our net loss in any given
period could be greater than anticipated and the market price of the Convertible
Notes and our common stock could decline.

    Our ability to become profitable depends on our ability to generate and
sustain substantially higher net sales while maintaining reasonable expense
levels. If we do achieve profitability, we cannot be certain that we would be
able to sustain or increase profitability on a quarterly or annual basis in the
future.

                                       17
<PAGE>
ANY FAILURE BY US TO SUCCESSFULLY EXPAND OUR DISTRIBUTION OPERATIONS WOULD HAVE
A MATERIAL ADVERSE EFFECT ON US.

    Any failure by us to successfully expand our distribution operations to
accommodate increases in demand and customer orders would have a material
adverse effect on our business prospects, financial condition and operating
results. Under such circumstances, the material adverse effects may include,
among other things, an inability to increase net sales in accordance with the
expectations of securities analysts and investors; increases in costs that we
may incur to meet customer expectations; increases in fulfillment expenses if we
are required to rely on more expensive fulfillment systems than anticipated or
incur additional costs for balancing merchandise inventories among multiple
distribution facilities; loss of customer loyalty and repeat business from
customers if they become dissatisfied with our delivery services; and damage to
our reputation and brand image arising from uncertainty with respect to our
distribution operations. These risks are greatest during the fourth calendar
quarter of each year, when our sales increase substantially relative to other
quarters and the demand on our distribution operations increases
proportionately. For example, during the 1999 holiday season, the e-commerce
industry, including eToys, was the subject of widespread negative publicity
relating principally to order fulfillment and related customer service issues.
Such publicity, together with the customer dissatisfaction to which it relates,
may result in loss of consumer confidence in e-commerce generally or in eToys in
particular, which may have a material adverse impact on us. In addition, the
cost of meeting customer expectations during the 1999 holiday season was very
high due to the intensely competitive e-commerce environment, in which many
e-commerce companies engaged in high levels of discounting, couponing and free
shipping or free shipping upgrades in order to attract customers. This
competitive environment is likely to increase in the foreseeable future, and we
may be required to incur additional costs to meet consumer expectations and to
remain competitive with other e-commerce companies. Since our limited operating
history makes it difficult to accurately estimate the number of orders that may
be received during the fourth calendar quarter, we may experience either
inadequate or excess fulfillment capacity during this quarter, either of which
could have a material adverse impact on us. The occurrence of one or more of
these events may cause the market price of the Convertible Notes and our common
stock to decline.

    We currently operate our own distribution facilities in the cities of
Commerce and San Francisco, California, and Swindon, England. In addition, by
spring 2000, we expect to begin shipments from our new distribution center
located in Danville, Virginia. Through March 31, 2000, we will also continue to
use the fulfillment services of our third-party distributor, Fingerhut Business
Services, located in Provo, Utah and St. Cloud, Minnesota. After that date, our
relationship with Fingerhut will terminate and we will rely solely on our own
distribution centers. In cooperation with Fingerhut, we have commenced an
orderly transition of inventory from Fingerhut facilities to our own facilities,
which is expected to be completed in approximately three months. We have in the
past and continue to devote substantial resources to the expansion of our
distribution operations among these facilities. This expansion may cause
disruptions in our business as well as unexpected costs. We are not experienced
with coordinating and managing distribution operations in geographically distant
locations or with certain of the automation and technological features of the
distribution operations that are planned for our Virginia facility and that
continue to be developed and refined to meet our needs. This may result in
increased costs as we seek to meet customers' expectations, balance merchandise
inventories among our distribution facilities and take other steps that may be
necessary to meet the demands placed on our distribution operations,
particularly during the fourth calendar quarter of the year. Despite the fact
that we devote substantial resources to the expansion and refinement of our
distribution operations, there can be no assurance that our existing or future
distribution operations will be sufficient to accommodate increases in demand
and customer orders.

                                       18
<PAGE>
IF WE EXPERIENCE PROBLEMS IN OUR DISTRIBUTION OPERATIONS, WE COULD LOSE
CUSTOMERS.

    We rely upon third-party carriers for product shipments, including shipments
to and from our distribution facilities. We are therefore subject to the risks,
including employee strikes and inclement weather, associated with such carriers'
ability to provide delivery services to meet our shipping needs. In addition,
failure to deliver products to our customers in a timely and accurate manner
would damage our reputation and brand. We also depend upon temporary employees
to adequately staff our distribution facilities, particularly during the holiday
shopping season. If we do not have sufficient sources of temporary employees, we
could lose customers.

OUR OPERATING RESULTS ARE VOLATILE AND DIFFICULT TO PREDICT. IF WE FAIL TO MEET
THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS AND INVESTORS, THE MARKET PRICE OF
THE CONVERTIBLE NOTES AND OUR COMMON STOCK MAY DECLINE SIGNIFICANTLY.

    Our annual and quarterly operating results have fluctuated in the past and
may fluctuate significantly in the future due to a variety of factors, many of
which are outside of our control. Because our operating results are volatile and
difficult to predict, we believe that quarter-to-quarter comparisons of our
operating results are not a good indication of our future performance. It is
likely that in some future quarter our operating results may fall below the
expectations of securities analysts and investors. In this event, the trading
price of the Convertible Notes and our common stock may decline significantly.

    Factors that may harm our business or cause our operating results to
fluctuate include the following:

    - our inability to obtain new customers at reasonable cost, retain existing
      customers, or encourage repeat purchases;

    - decreases in the number of visitors to our Web site or our inability to
      convert visitors to our Web site into customers;

    - the mix of children's products, including toys, video games, books,
      software, videos, music and baby-oriented products sold by us;

    - seasonality;

    - our inability to manage inventory levels or control inventory shrinkage;

    - our inability to manage our distribution operations;

    - our inability to adequately maintain, upgrade and develop our Web site,
      the systems that we use to process customers' orders and payments or our
      computer network;

    - the ability of our competitors to offer new or enhanced Web sites,
      services or products;

    - price competition;

    - an increase in the level of our product returns;

    - fluctuations in the demand for children's and baby products associated
      with movies, television and other entertainment events;

    - our inability to obtain popular children's products, including toys, video
      games, books, software, videos, music and baby-oriented products from our
      vendors;

    - fluctuations in the amount of consumer spending on children's products,
      including toys, video games, books, software, videos, music and
      baby-oriented products;

                                       19
<PAGE>
    - the termination of existing or failure to develop new marketing
      relationships with key business partners;

    - the extent to which we are not able to participate in cooperative
      advertising campaigns with major brand names as we have done in the past;

    - increases in the cost of online or offline advertising;

    - the amount and timing of operating costs and capital expenditures relating
      to expansion of our operations, including international expansion;

    - unexpected increases in shipping costs or delivery times, particularly
      during the holiday season;

    - technical difficulties, system downtime or Internet brownouts;

    - breaches of our website security systems, "denial of service" attacks on
      our website or other comparable issues arising from computer hacking or
      related types of activities;

    - government regulations related to use of the Internet for commerce or for
      sales and distribution of children's products, including toys, video
      games, books, software, videos, music and baby-oriented products; and

    - economic conditions specific to the Internet, online commerce and the
      children's and baby products industries.

    A number of factors will cause our gross margins to fluctuate in future
periods, including the mix of children's products, including toys, video games,
books, software, videos, music and baby-oriented products sold by us, inventory
management, inbound and outbound shipping and handling costs, the level of
product returns and the level of discount pricing and promotional coupon usage.
Any change in one or more of these factors could reduce our gross margins in
future periods. In addition, if the SEC determines to require us to classify
certain distribution center costs as costs of sales, our gross profit will be
correspondingly affected. See the introduction to "Management's Discussion and
Analysis of Financial Condition and Results of Operations".

BECAUSE WE EXPERIENCE SEASONAL FLUCTUATIONS IN OUR NET SALES, OUR QUARTERLY
RESULTS WILL FLUCTUATE AND OUR ANNUAL RESULTS COULD BE BELOW EXPECTATIONS.

    We have historically experienced and expect to continue to experience
seasonal fluctuations in our net sales. These seasonal patterns will cause
quarterly fluctuations in our operating results. In particular, a
disproportionate amount of our net sales have been realized during the fourth
calendar quarter and we expect this trend to continue in the future.

    In anticipation of increased sales activity during the fourth calendar
quarter, we hire a significant number of temporary employees to bolster our
permanent staff and we significantly increase our inventory levels. For this
reason, if our net sales were below seasonal expectations during this quarter,
our annual operating results could be below the expectations of securities
analysts and investors.

    Due to our limited operating history, it is difficult to predict the
seasonal pattern of our sales and the impact of such seasonality on our business
and financial results. In the future, our seasonal sales patterns may become
more pronounced, may strain our personnel and warehousing and order shipment
activities and may cause a shortfall in net sales as compared to expenses in a
given period.

                                       20
<PAGE>
WE FACE SIGNIFICANT INVENTORY RISK BECAUSE CONSUMER DEMAND CAN CHANGE FOR
PRODUCTS BETWEEN THE TIME THAT WE ORDER PRODUCTS AND THE TIME THAT WE RECEIVE
THEM.

    We carry a significant level of inventory. As a result, the rapidly changing
trends in consumer tastes in the market for children's products, including toys,
video games, books, software, videos, music and baby-oriented products, subject
us to significant inventory risks. It is critical to our success that we
accurately predict these trends and do not overstock unpopular products. The
demand for specific products can change between the time the products are
ordered and the date of receipt. We are particularly exposed to this risk
because we derive a majority of our net sales in the fourth calendar quarter of
each year. Our failure to sufficiently stock popular toys and other products in
advance of such fourth calendar quarter would harm our operating results for the
entire fiscal year.

    In the event that one or more products do not achieve widespread consumer
acceptance, we may be required to take significant inventory markdowns, which
could reduce our net sales and gross margins. This risk may be greatest in the
first calendar quarter of each year, after we have significantly increased
inventory levels for the holiday season. We believe that this risk will increase
as we open new departments or enter new product categories due to our lack of
experience in purchasing products for these categories. In addition, to the
extent that demand for our products increases over time, we may be forced to
increase inventory levels. Any such increase would subject us to additional
inventory risks.

BECAUSE WE DO NOT HAVE LONG-TERM OR EXCLUSIVE VENDOR CONTRACTS, WE MAY NOT BE
ABLE TO GET SUFFICIENT QUANTITIES OF POPULAR CHILDREN'S PRODUCTS IN A TIMELY
MANNER. AS A RESULT, WE COULD LOSE CUSTOMERS.

    If we are not able to offer our customers sufficient quantities of toys or
other products in a timely manner, we could lose customers and our net sales
could be below expectations. Our success depends on our ability to purchase
products in sufficient quantities at competitive prices, particularly for the
holiday shopping season. As is common in the industry, we do not have long-term
or exclusive arrangements with any vendor or distributor that guarantee the
availability of toys or other children's products for resale. Therefore, we do
not have a predictable or guaranteed supply of toys or other products.

TO MANAGE OUR GROWTH AND EXPANSION, WE NEED TO IMPROVE AND IMPLEMENT FINANCIAL
AND MANAGERIAL CONTROLS AND REPORTING SYSTEMS AND PROCEDURES. IF WE ARE UNABLE
TO DO SO SUCCESSFULLY, OUR RESULTS OF OPERATIONS WILL BE IMPAIRED.

    Our rapid growth in personnel and operations has placed, and will continue
to place, a significant strain on our management, information systems and
resources. In addition, with the acquisition of BabyCenter, we added over 160
new employees, including managerial, technical and operations personnel.
Further, we continue to expand our distribution operations, which currently
include distribution facilities in the cities of Commerce and San Francisco,
California and Swindon, England, and will include a distribution facility in
Virginia that will begin operations in the spring 2000. Our distribution
operations also currently include fulfillment services from a third-party
vendor, Fingerhut Business Services, although those services will terminate
effective March 31, 2000, after which we will rely solely on our own
distribution operations. This expansion as well as the transition of inventory
from third-party facilities to our own facilities may cause disruptions in our
business as well as unexpected costs. We are not experienced with coordinating
and managing distribution operations in geographically distant locations or with
certain of the automation and technological features of the distribution
operations that are planned for our Virginia facility. The integration of these
information systems may negatively affect our ability to obtain financial
information and other data on a timely and reliable basis.

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<PAGE>
    In order to manage this growth effectively, we need to continue to improve
our financial and managerial controls and reporting systems and procedures. If
we continue to experience a significant increase in the number of our personnel
and expansion of our distribution operations, our existing management team may
not be able to effectively train, supervise and manage all of our personnel or
effectively oversee all of our distribution operations. In addition, our
existing information systems may not be able to handle adequately the increased
volume of information and transactions that would result from increased growth.
Our failure to successfully implement, improve and integrate these systems and
procedures would cause our results of operations to be below expectations.

RISK OF INTERNATIONAL EXPANSION

    In October 1999, we launched eToys.co.uk, which serves customers in the
United Kingdom, and in November 1999, we began serving all provinces of Canada
through our eToys.com store. We plan to continue to expand our presence in
foreign markets. We have relatively little experience in purchasing, marketing
and distributing products or services for these markets and may not benefit from
any first-to-market advantages. It will be costly to establish international
facilities and operations, promote our brand internationally, and develop
localized Web sites and stores and other systems. We may not succeed in our
efforts in these countries. If net sales from international activities do not
offset the expense of establishing and maintaining foreign operations, our
business prospects, financial condition and operating results will suffer.

    As the international online commerce market continues to grow, competition
in this market will likely intensify. In addition, governments in foreign
jurisdictions may regulate Internet or other online services in such areas as
content, privacy, network security, encryption or distribution. This may affect
our ability to conduct business internationally.

WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY AGAINST CURRENT AND FUTURE
COMPETITORS.

    The online commerce market is new, rapidly evolving and intensely
competitive. Increased competition is likely to result in price reductions,
reduced gross margins and loss of market share, any of which could seriously
harm our net sales and results of operations. We expect competition to intensify
in the future because current and new competitors can enter our market with
little difficulty and can launch new Web sites at a relatively low cost. In
addition, the children's products industries, including toy, video game, books,
software, video, music and baby-oriented products, are intensely competitive.

    We currently or potentially compete with a variety of other companies,
including:

    - other online companies that include toys and children's and baby products
      as part of their product offerings, such as Amazon.com,
      Barnesandnoble.com, CDnow, Beyond.com, Reel.com, iBaby, BabyCatalog.com,
      iVillage and Women.com;

    - traditional store-based toy and children's and baby products retailers
      such as Toys R Us, FAO Schwarz, Zany Brainy, Noodle Kidoodle, babyGap,
      GapKids, Gymboree, KB Toys, The Right Start and Babies R Us;

    - major discount retailers such as Wal-Mart, Kmart and Target;

    - online efforts of these traditional retailers, including the online stores
      operated by Toys R Us, Wal-Mart, FAO Schwarz, babyGap, GapKids, KB Toys
      (i.e., KB Kids) and Gymboree;

    - physical and online stores of entertainment entities that sell and license
      children and baby products, such as The Walt Disney Company and Warner
      Bros.;

    - catalog retailers of children's and baby products as well as products for
      toddlers and expectant mothers;

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<PAGE>
    - vendors or manufacturers of children's and baby products that currently
      sell some of their products directly online, such as Mattel and Hasbro;

    - Internet portals and online service providers that feature shopping
      services, such as AOL, Yahoo!, Excite and Lycos; and

    - various smaller online retailers of children's and baby products, such as
      SmarterKids.com, Red Rocket and ToySmart.com.

    Many traditional store-based and online competitors have longer operating
histories, larger customer or user bases, greater brand recognition and
significantly greater financial, marketing and other resources than we do. Many
of these competitors can devote substantially more resources to Web site
development than we can. In addition, larger, well-established and well-financed
entities may join with online competitors or suppliers of children's products,
including toys, video games, books, software, video, music and baby-oriented
products as the use of the Internet and other online services increases.

    Our competitors may be able to secure products from vendors on more
favorable terms, fulfill customer orders more efficiently and adopt more
aggressive pricing or inventory availability policies than we can. Traditional
store-based retailers also enable customers to see and feel products in a manner
that is not possible over the Internet.

IF WE ENTER NEW BUSINESS CATEGORIES THAT DO NOT ACHIEVE MARKET ACCEPTANCE, OUR
BRAND AND REPUTATION COULD BE DAMAGED AND WE COULD FAIL TO ATTRACT NEW
CUSTOMERS.

    Any new department or product category that is launched or acquired by us,
such as BabyCenter, which is not favorably received by consumers could damage
our brand or reputation. This damage could impair our ability to attract new
customers, which could cause our net sales to fall below expectations. The
expansion of our business to include BabyCenter or any other new department or
product category will require significant additional expenses, and strain our
management, financial and operational resources. This type of expansion would
also subject us to increased inventory risk. We may choose to expand our
operations by developing other new departments or product categories, promoting
new or complementary products, expanding the breadth and depth of products and
services offered or expanding our market presence through relationships with
third parties. In addition, we may pursue the acquisition of other new or
complementary businesses, products or technologies.

IF WE DO NOT SUCCESSFULLY EXPAND OUR WEB SITE AND THE SYSTEMS THAT PROCESS
CUSTOMERS' ORDERS, WE COULD LOSE CUSTOMERS AND OUR NET SALES COULD BE REDUCED.

    If we fail to rapidly upgrade our Web site in order to accommodate increased
traffic, we may lose customers, which would reduce our net sales. Furthermore,
if we fail to rapidly expand the computer systems that we use to process and
ship customer orders and process payments, we may not be able to successfully
distribute customer orders. As a result, we could lose customers and our net
sales could be reduced. In addition, our failure to rapidly upgrade our Web site
or expand these computer systems without system downtime, particularly during
the fourth calendar quarter, would further reduce our net sales. We may
experience difficulty in improving and maintaining such systems if our employees
or contractors that develop or maintain our computer systems become unavailable
to us. We have experienced periodic systems interruptions, which we believe will
continue to occur, while enhancing and expanding these computer systems.

OUR FACILITIES AND SYSTEMS ARE VULNERABLE TO NATURAL DISASTERS AND OTHER
UNEXPECTED PROBLEMS. THE OCCURRENCE OF A NATURAL DISASTER OR

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<PAGE>
OTHER UNEXPECTED PROBLEM COULD DAMAGE OUR REPUTATION AND BRAND AND REDUCE OUR
NET SALES.

    We are vulnerable to natural disasters and other unanticipated problems that
are beyond our control. Our office facilities in Southern California, Northern
California and London, England, house substantially all of our product
development and information systems. Our third-party Web site hosting facilities
located in Sunnyvale, California and Herndon, Virginia, house substantially all
of our computer and communications hardware systems. Our distribution facilities
located in California, Virginia, Utah, Minnesota and England house substantially
all of our product inventory (although inventory located in Utah and Minnesota
is currently being transferred to our other facilities, which transition is
expected to be completed by May 2000). A natural disaster, such as an
earthquake, or harsh weather or other comparable problems that are beyond our
control could cause interruptions or delays in our business and loss of data or
render us unable to accept and fulfill customer orders. Any such interruptions
or delays at these facilities would reduce our net sales. In addition, our
systems and operations are vulnerable to damage or interruption from fire,
flood, power loss, telecommunications failure, break-ins, earthquakes and
similar events. We have no formal disaster recovery plan and our business
interruption insurance may not adequately compensate us for losses that may
occur. In addition, the failure by the third-party facilities to provide the
data communications capacity required by us, as a result of human error, natural
disaster or other operational disruptions, could result in interruptions in our
service. The occurrence of any or all of these events could damage our
reputation and brand and impair our business.

OUR NET SALES COULD DECREASE IF OUR ONLINE SECURITY MEASURES FAIL.

    Our relationships with our customers may be adversely affected if the
security measures that we use to protect their personal information, such as
credit card numbers, are ineffective. If, as a result, we lose many customers,
our net sales could decrease. We rely on security and authentication technology
that we license from third parties. With this technology, we perform real-time
credit card authorization and verification with our bank. We cannot predict
whether events or developments will result in a compromise or breach of the
technology we use to protect a customer's personal information.

    Furthermore, our servers may be vulnerable to computer viruses, physical or
electronic break-ins and similar disruptions. For example, during December 1999,
our website was subjected to various "denial of service" attacks. These attacks
consist of computer programs that are launched against a website and simulate
extremely heavy traffic and usage during a concentrated time period in an effort
to slow down or terminate the operation of the website. During February 1999,
numerous other major internet companies also suffered similar denial of service
attacks, indicating that these attacks may become more widespread. We may need
to expend significant additional capital and other resources to protect against
such attacks and other security breaches and to maintain the integrity of our
website infrastructure, database and systems. We cannot assure you that our
efforts will be successful. If we fail to protect against any of these attacks
or security breaches, it could have a material adverse impact on our website and
our business, financial condition and prospects.

OUR NET SALES AND GROSS MARGINS WOULD DECREASE IF WE EXPERIENCE SIGNIFICANT
CREDIT CARD FRAUD.

    A failure to adequately control fraudulent credit card transactions would
reduce our net sales and our gross margins because we do not carry insurance
against this risk. We have developed technology to help us to detect the
fraudulent use of credit card information. Nonetheless, to date, we have
suffered losses as a result of orders placed with fraudulent credit card data
even though the associated financial institution approved payment of the orders.
Under current credit card practices, we are liable for fraudulent credit card
transactions because we do not obtain a cardholder's signature.

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<PAGE>
WE FACE THE RISK OF INVENTORY SHRINKAGE.

    If the security measures we use at our distribution facilities do not reduce
or prevent inventory shrinkage, our gross profit margin may decrease. We have
undertaken a number of measures designed to address inventory shrinkage,
including the installation of enhanced security measures at our distribution
facilities. These measures may not successfully reduce or prevent inventory
shrinkage in future periods. Our failure to successfully improve the security
measures we use at our distribution facilities may cause our gross profit
margins and results of operations to be significantly below expectations in
future periods.

IF WE DO NOT RESPOND TO RAPID TECHNOLOGICAL CHANGES, OUR SERVICES COULD BECOME
OBSOLETE AND WE COULD LOSE CUSTOMERS.

    If we face material delays in introducing new services, products and
enhancements, our customers may forego the use of our services and use those of
our competitors. To remain competitive, we must continue to enhance and improve
the functionality and features of our online store. The Internet and the online
commerce industry are rapidly changing. If competitors introduce new products
and services embodying new technologies, or if new industry standards and
practices emerge, our existing Web site and proprietary technology and systems
may become obsolete.

    To develop our Web site and other proprietary technology entails significant
technical and business risks. We may use new technologies ineffectively or we
may fail to adapt our Web site, our transaction processing systems and our
computer network to meet customer requirements or emerging industry standards.

INTELLECTUAL PROPERTY CLAIMS AGAINST US CAN BE COSTLY AND COULD IMPAIR OUR
BUSINESS.

    Other parties may assert infringement or unfair competition claims against
us. In the past, a toy distributor using a name similar to ours sent us notice
of a claim of infringement of proprietary rights, which claim was subsequently
withdrawn. We have also received a claim from the holder of a home shopping
video catalog patent that our Internet marketing program infringes such patent.
We expect to receive other notices from other third parties in the future. We
cannot predict whether third parties will assert claims of infringement against
us, or whether any past or future assertions or prosecutions will harm our
business. If we are forced to defend against any such claims, whether they are
with or without merit or are determined in our favor, then we may face costly
litigation, diversion of technical and management personnel, or product shipment
delays. As a result of such a dispute, we may have to develop non-infringing
technology or enter into royalty or licensing agreements. Such royalty or
licensing agreements, if required, may be unavailable on terms acceptable to us,
or at all. If there is a successful claim of product infringement against us and
we are unable to develop non-infringing technology or license the infringed or
similar technology on a timely basis, it could impair our business.

IF THE PROTECTION OF OUR TRADEMARKS AND PROPRIETARY RIGHTS IS INADEQUATE, OUR
BRAND AND REPUTATION COULD BE IMPAIRED AND WE COULD LOSE CUSTOMERS.

    The steps we take to protect our proprietary rights may be inadequate. We
regard our copyrights, service marks, trademarks, trade dress, trade secrets and
similar intellectual property as critical to our success. We rely on trademark
and copyright law, trade secret protection and confidentiality or license
agreements with our employees, customers, partners and others to protect our
proprietary rights. We currently hold registered trademarks for "eToys" and
"BabyCenter". Effective trademark, service mark, copyright and trade secret
protection may not be available in every country in which we will sell our
products and services online. Furthermore, the relationship between regulations
governing domain names and laws protecting trademarks and similar proprietary
rights is unclear. Therefore, we may be

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<PAGE>
unable to prevent third parties from acquiring domain names that are similar to,
infringe upon or otherwise decrease the value of our trademarks and other
proprietary rights.

THE LOSS OF THE SERVICES OF ONE OR MORE OF OUR KEY PERSONNEL, OR OUR FAILURE TO
ATTRACT, ASSIMILATE AND RETAIN OTHER HIGHLY QUALIFIED PERSONNEL IN THE FUTURE,
COULD DISRUPT OUR OPERATIONS AND RESULT IN A REDUCTION IN NET SALES.

    The loss of the services of one or more of our key personnel could seriously
interrupt our business. We depend on the continued services and performance of
our senior management and other key personnel, particularly Edward C. Lenk, our
President and Chief Executive Officer. None of our officers or key employees is
bound by an employment agreement for any specific term other than the Chief
Executive Officer and President of BabyCenter. Our relationships with these
officers and key employees are at will. We do not have "key person" life
insurance policies covering any of our employees.

WE MAY BE ADVERSELY IMPACTED IF THE SOFTWARE, COMPUTER TECHNOLOGY AND OTHER
SYSTEMS WE USE ARE NOT YEAR 2000 COMPLIANT.

    Any failure of our material systems, our vendors' material systems or the
Internet to be year 2000 compliant would have material adverse consequences for
us. As of the date of this filing, we have not incurred business disruptions as
a result of year 2000 issues. However, while no such occurrence has developed,
year 2000 issues may not become apparent immediately and may therefore be
experienced in the future. Such issues could result in difficulties in operating
our Web site effectively, taking product orders, making product deliveries or
conducting other fundamental parts of our business. We also depend on the year
2000 compliance of the computer systems and financial services used by
consumers. A significant disruption in the ability of consumers to reliably
access the Internet or portions of it or to use their credit cards would have an
adverse effect on demand for our services and would have a material adverse
effect on us.

THERE ARE RISKS ASSOCIATED WITH THE BABYCENTER MERGER AND OTHER POTENTIAL
ACQUISITIONS. AS A RESULT, WE MAY NOT ACHIEVE THE EXPECTED BENEFITS OF THE
BABYCENTER MERGER AND OTHER POTENTIAL ACQUISITIONS.

    We may not realize the anticipated benefits from the BabyCenter merger. We
may not be able to successfully assimilate the additional personnel, operations,
acquired technology and products into our business. The merger may further
strain our existing financial and managerial controls and reporting systems and
procedures. In addition, key BabyCenter personnel may decide not to work for us.
These difficulties could disrupt our ongoing business, distract management and
employees or increase our expenses. Further, the physical expansion in
facilities that has occurred as a result of this merger may result in
disruptions that seriously impair our business. In particular, we now have
operations in multiple facilities in geographically distant areas. We are not
experienced in managing facilities or operations in geographically distant
areas.

    If we are presented with appropriate opportunities, we intend to make other
investments in complementary companies, products or technologies. We may not
realize the anticipated benefits of any other acquisition or investment. If we
buy another company, we will likely face the same risks, uncertainties and
disruptions as discussed above with respect to the BabyCenter merger.
Furthermore, we may have to incur debt or issue equity securities to pay for any
additional future acquisitions or investments, the issuance of which would be
dilutive to us or our existing securityholders and could affect the price of the
Convertible Notes and our common stock.

                                       26
<PAGE>
IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US EVEN IF DOING SO WOULD BE
BENEFICIAL TO OUR SECURITYHOLDERS.

    Provisions of our Amended and Restated Certificate of Incorporation, our
Bylaws and Delaware law could make it more difficult for a third party to
acquire us, even if doing so would be beneficial to our securityholders.

    We are subject to Section 203 of the Delaware General Corporation Law, which
regulates corporate acquisitions. In general, Section 203 prohibits a publicly
held Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years following the date the
person became an interested stockholder, unless:

    - the Board of Directors approved the transaction in which such stockholder
      became an interested stockholder prior to the date the interested
      stockholder attained such status;

    - upon consummation of the transaction that resulted in the stockholder's
      becoming an interested stockholder, he or she owned at least 85% of the
      voting stock of the corporation outstanding at the time the transaction
      commenced, excluding shares owned by persons who are directors and also
      officers; or

    - on or subsequent to such date the business combination is approved by the
      Board of Directors and authorized at an annual or special meeting of
      stockholders.

    A "business combination" generally includes a merger, asset or stock sale,
or other transaction resulting in a financial benefit to the interested
stockholder. In general, an "interested stockholder" is a person who, together
with affiliates and associates, owns, or within three years prior to the
determination of interested stockholder status, did own, 15% or more of a
corporation's voting stock.

    Our Amended and Restated Certificate of Incorporation and Bylaws do not
provide for the right of stockholders to act by written consent without a
meeting or for cumulative voting in the election of directors. In addition, our
Amended and Restated Certificate of Incorporation permits the Board of Directors
to issue preferred stock with voting or other rights without any stockholder
action. Commencing at our first annual meeting of stockholders following the
date on which we have at least 800 stockholders, which is expected to be our
annual meeting held in 2000, our Amended and Restated Certificate of
Incorporation provides for the Board of Directors to be divided into three
classes, with staggered three-year terms. As a result, only one class of
directors will be elected at each annual meeting of stockholders. Each of the
two other classes of directors will continue to serve for the remainder of its
respective three-year term. These provisions, which require the vote of
stockholders holding at least a majority of the outstanding common stock to
amend, may have the effect of deterring hostile takeovers or delaying changes in
our management.

                         RISKS RELATED TO OUR INDUSTRY

IF WE ARE UNABLE TO ACQUIRE THE NECESSARY WEB DOMAIN NAMES, OUR BRAND AND
REPUTATION COULD BE DAMAGED AND WE COULD LOSE CUSTOMERS.

    We may be unable to acquire or maintain Web domain names relating to our
brand in the United States and other countries in which we may conduct business.
As a result, we may be unable to prevent third parties from acquiring and using
domain names relating to our brand. Such use could damage our brand and
reputation and take customers away from our Web site. We currently hold various
relevant domain names, including the "eToys.com" domain name. The acquisition
and maintenance of domain names generally is regulated by governmental agencies
and their designees. For example, in the United States, the National Science
Foundation has appointed Network Solutions, Inc. as the current exclusive
registrar for the ".com", ".net" and ".org" generic top-level domains. The
regulation of domain names in the United States and in foreign countries is
subject to change in the near future. Such changes in

                                       27
<PAGE>
the United States are expected to include a transition from the current system
to a system which is controlled by a non-profit corporation and the creation of
additional top-level domains. Governing bodies may establish additional
top-level domains, appoint additional domain name registrars or modify the
requirements for holding domain names.

WE MAY NEED TO CHANGE THE MANNER IN WHICH WE CONDUCT OUR BUSINESS IF GOVERNMENT
REGULATION INCREASES.

    The adoption or modification of laws or regulations relating to the Internet
could adversely affect the manner in which we currently conduct our business. In
addition, the growth and development of the market for online commerce may lead
to more stringent consumer protection laws, both in the United States and
abroad, that may impose additional burdens on us. Laws and regulations directly
applicable to communications or commerce over the Internet are becoming more
prevalent. The United States Congress recently enacted Internet laws regarding
children's privacy, copyrights, taxation and the transmission of sexually
explicit material, and the Federal Trade Commission recently published the new
Children's Online Privacy Protection Rule to become effective April 21, 2000.
The European Union recently enacted its own privacy regulations. The law of the
Internet, however, remains largely unsettled, even in areas where there has been
some legislative action. It may take years to determine whether and how existing
laws such as those governing intellectual property, privacy, libel and taxation
apply to the Internet.

    The FTC has promulgated a variety of laws related to consumer protection, a
number of which apply to our business and operations. In January 2000 we
received two request letters from the FTC. The first letter relates to an FTC
study of the marketing of video games and software to children, particularly
those that have a rating of "mature" or higher under the Entertainment Software
Rating Board interactive rating system. The second letter relates to an FTC
inquiry to determine compliance with the FTC's Mail or Telephone Order
Merchandise Rule, which regulates the timeliness of the shipment of orders
placed by customers. We are in the process of replying to the FTC's requests and
inquiries. Any failure by us to comply with the rules and regulations
promulgated by the FTC or other governmental authorities could result in action
being taken against us that could have a material adverse effect on our business
and results of operations.

    In order to comply with new or existing laws regulating online commerce, we
may need to modify the manner in which we do business, which may result in
additional expenses. For instance, we may need to spend time and money revising
the process by which we fulfill customers' orders to ensure that each shipment
complies with applicable laws. We may need to hire additional personnel to
monitor our compliance with applicable laws. We may also need to modify our
software to further protect our customers' personal information.

WE MAY BE SUBJECT TO LIABILITY FOR THE INTERNET CONTENT THAT WE PUBLISH.

    As a publisher of online content, we face potential liability for
defamation, negligence, copyright, patent or trademark infringement, or other
claims based on the nature and content of materials that we publish or
distribute. In particular, our BabyCenter Web site offers a variety of content
for new and expectant parents, including content relating to pregnancy,
fertility and infertility, nutrition, child rearing and related subjects. If we
face liability, then our reputation and our business may suffer. In the past,
plaintiffs have brought these types of claims and sometimes successfully
litigated them against online services. Although we carry general liability
insurance to cover claims of these types, there can be no assurance that such
insurance will be adequate to indemnify us for all liability that may be imposed
on us.

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<PAGE>
OUR NET SALES COULD DECREASE IF WE BECOME SUBJECT TO SALES AND OTHER TAXES.

    If one or more states or any foreign country successfully asserts that we
should collect sales or other taxes on the sale of our products, our net sales
and results of operations could be harmed. We do not currently collect sales or
other similar taxes for physical shipments of goods into states other than
California. However, one or more local, state or foreign jurisdictions may seek
to impose sales tax collection obligations on us. In addition, any new operation
in states outside California could subject our shipments in such states to state
sales taxes under current or future laws. If we become obligated to collect
sales taxes, we will need to update our system that processes customers' orders
to calculate the appropriate sales tax for each customer order and to remit the
collected sales taxes to the appropriate authorities. These upgrades will
increase our operating expenses. In addition, our customers may be discouraged
from purchasing products from us because they have to pay sales tax, causing our
net sales to decrease. As a result, we may need to lower prices to retain these
customers.

                      RISKS RELATED TO SECURITIES MARKETS

WE MAY BE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS.

    We cannot be certain that additional financing will be available to us on
favorable terms when required, or at all. If we raise additional funds through
the issuance of equity, equity-related or debt securities, such securities may
have rights, preferences or privileges senior to those of the rights of our
common stock or the Convertible Notes and our stockholders will experience
additional dilution. We require substantial working capital to fund our
business. Since our inception, we have experienced negative cash flow from
operations and expect to experience significant negative cash flow from
operations for the foreseeable future. Although we believe that the net proceeds
of this offering, together with current cash, cash equivalents and cash that may
be generated from operations, will be sufficient to meet our anticipated cash
needs through December 31, 2000, there can be no assurance to that effect.

THE MARKET PRICES OF THE CONVERTIBLE NOTES AND OUR COMMON STOCK MAY BE VOLATILE,
WHICH COULD RESULT IN SUBSTANTIAL LOSSES FOR INDIVIDUAL SECURITYHOLDERS.

    The market prices for the Convertible Notes and our common stock are likely
to be highly volatile and subject to wide fluctuations in response to factors
including the following, some of which are beyond our control:

    - actual or anticipated variations in our quarterly operating results;

    - announcements of technological innovations, increased cost of operations
      or new products or services by us or our competitors;

    - changes in financial estimates by securities analysts;

    - conditions or trends in the Internet and/or online commerce industries;

    - changes in the economic performance and/or market valuations of other
      Internet, online commerce or retail companies;

    - announcements by us or our competitors of significant acquisitions,
      strategic partnerships, joint ventures or capital commitments;

    - additions or departures of key personnel;

    - release of lock-up or other transfer restrictions on our outstanding
      shares of common stock or sales of additional shares of common stock; and

    - potential litigation.

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<PAGE>
    Since our initial public offering of common stock in May 1999 through the
date of this filing, the closing market price of our common stock on the Nasdaq
National Market has ranged from a high of $86 per share to a low of $13.75 per
share, indicating the extreme volatility in the market price of our common
stock.

    In the past, following periods of volatility in the market price of their
securities, many companies have been the subject of securities class action
litigation. If we were sued in a securities class action, it could result in
substantial costs and a diversion of management's attention and resources and
would cause the prices of the Convertible Notes and our common stock to fall.

                        RISKS RELATED TO OUR SECURITIES

AS A RESULT OF THE CONVERTIBLE NOTES OFFERING, WE HAVE A SIGNIFICANT AMOUNT OF
DEBT AND MAY HAVE INSUFFICIENT CASH FLOW TO SATISFY OUR DEBT SERVICE
OBLIGATIONS. IN ADDITION, THE AMOUNT OF OUR DEBT COULD IMPEDE OUR OPERATIONS AND
FLEXIBILITY.

    As a result of the Convertible Notes offering, we have a significant amount
of debt and debt service obligations. If we are unable to generate sufficient
cash flow or otherwise obtain funds necessary to make required payments on the
Convertible Notes, including from cash and cash equivalents on hand, we will be
in default under the terms of the indenture under which the Convertible Notes
were issued which could, in turn, cause defaults under our other existing and
future debt obligations.

    Even if we are able to meet our debt service obligations, the amount of debt
we have could adversely affect us in a number of ways, including by:

    - limiting our ability to obtain any necessary financing in the future for
      working capital, capital expenditures, debt service requirements or other
      purposes;

    - limiting our flexibility in planning for, or reacting to, changes in our
      business;

    - placing us at a competitive disadvantage relative to our competitors who
      have lower levels of debt;

    - making us more vulnerable to a downturn in our business or the economy
      generally;

    - requiring us to use a substantial portion of our cash flow from operations
      to pay principal and interest on our debt, instead of contributing those
      funds to other purposes such as working capital and capital expenditures;
      and

    - requiring us to maintain specific financial ratios and comply with other
      restrictive covenants in our existing and future agreements governing our
      debt obligations.

    To be able to meet our debt service requirements we must successfully
implement our business strategy. We cannot assure you that we will successfully
implement our business strategy or that we will be able to generate sufficient
cash flow from operating activities to meet our debt service obligations and
working capital requirements. Our ability to meet our obligations will be
dependent upon our future performance, which will be subject to prevailing
economic conditions and to financial, business and other factors.

    If the implementation of our business strategy is delayed or unsuccessful,
or if we do not generate sufficient cash flow to meet our debt service and
working capital requirements, we may need to seek additional financing. If we
are unable to obtain such financing on terms that are acceptable to us, we could
be forced to dispose of assets to make up for any shortfall in the payments due
on our debt under circumstances that might not be favorable to realizing the
highest price for those assets. A substantial portion of our assets consist of
intangible assets, the value of which will depend upon a

                                       30
<PAGE>
variety of factors, including without limitation, the success of our business.
As a result, we cannot assure you that our assets could be sold quickly enough,
or for amounts sufficient, to meet our obligations, including our obligations
under the Convertible Notes.

WE MAY BE UNABLE TO REPURCHASE THE CONVERTIBLE NOTES UPON THE OCCURRENCE OF A
CHANGE OF CONTROL.

    Upon the occurrence of a change of control of eToys, we are required to
offer to repurchase all outstanding Convertible Notes. Although the indenture
allows us, subject to satisfaction of certain conditions, to repurchase the
Convertible Notes using shares of our common stock, if a change of control were
to occur, our ability to repurchase the Convertible Notes with cash will depend
on the availability of sufficient funds and compliance with the terms of any
debt ranking senior to the Convertible Notes. Our failure to repurchase tendered
Convertible Notes upon a change of control would constitute an event of default
under the indenture, which could result in the acceleration of the maturity of
the Convertible Notes and all of our other outstanding debt. These repurchase
requirements may also delay or make it harder for others to obtain control of
us.

SUBSTANTIAL SALES OF OUR COMMON STOCK COULD CAUSE OUR STOCK PRICE AND THE PRICE
OF THE CONVERTIBLE NOTES TO FALL.

    If our stockholders sell substantial amounts of our common stock, including
shares issued upon the exercise of outstanding options, the market prices of the
Convertible Notes and our common stock could fall. Such sales also might make it
more difficult for us to sell equity or equity-related securities in the future
at a time and price that we deem appropriate. As of December 31, 1999, we had
outstanding 119,591,045 shares of common stock and 20,823,316 options to acquire
common stock, of which 4,036,342 options were vested and exercisable. Of the
shares that are currently outstanding, 14,852,200 are freely tradeable in the
public market, 102,738,847 are tradeable in the public market subject to the
restrictions, if any, applicable under Rule 144 and Rule 145 of the Securities
Act, and 1,999,998 are tradeable in the public market beginning on May 19, 2000
subject to the restrictions, if any, applicable under Rule 144 of the Securities
Act. All shares acquired upon exercise of options will be freely tradeable in
the public market.

    In general, under Rule 144 as currently in effect, a person who has
beneficially owned restricted securities for at least one year would be entitled
to sell within any three-month period a number of shares that does not exceed
the greater of (a) one percent of the number of shares of common stock then
outstanding or (b) the average weekly trading volume of the common stock during
the four calendar weeks preceding the sale. Sales under Rule 144 are also
subject to requirements with respect to manner of sale, notice, and the
availability of current public information about us. Under Rule 144(k), a person
who is not deemed to have been our affiliate at any time during the three months
preceding a sale, and who has beneficially owned the shares proposed to be sold
for at least two years, is entitled to sell such shares without complying with
the manner of sale, public information, volume limitation or notice provisions
of Rule 144. Although the holders of a substantial amount of our common stock
are subject to selling restrictions contained in Rule 144, these restrictions do
not significantly restrain trading in our common stock because the volume of
trading in our common stock on a daily basis has resulted in a high volume
limitation for Rule 144 purposes. Sales by our stockholders of a substantial
amount of our common stock could adversely affect the market price of the
Convertible Notes and our common stock.

                                       31
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

    We are subject to market risk related to changes in interest rates and
foreign currency exchange rates. We do not use derivative financial instruments.

    INTEREST RATE RISK.  We maintain a portfolio of highly liquid cash
equivalents maturing in three months or less as of the date of purchase. Given
the short-term nature of these investments, we believe we are not subject to
significant interest rate risk with respect to these investments. Additionally,
we are subject to interest rate risk related to our long-term debt, principally
the Convertible Notes, notes payable and capital lease obligations. The
Convertible Notes, notes payable and capital lease obligations bear interest at
fixed rates, and their carrying amount approximates fair value based on
borrowing rates currently available to us. As such, we believe that market risk
arising from our long-term debt is not material.

    FOREIGN CURRENCY RISK.  We currently have a wholly-owned subsidiary with
operations in the United Kingdom. All sales and expenses incurred by the foreign
subsidiary are denominated in the British pound, which is considered the
functional currency. As such, we are exposed to foreign currency risk which
arises in part from funding denominated in British pounds provided to the
foreign subsidiary and from the translation of the foreign subsidiary's
financial results into U.S. dollars during consolidation. As exchange rates
vary, our results from operations and profitability may be adversely impacted.
As of December 31, 1999, the effect of the foreign currency exchange rate
fluctuations has not been material.

                                       32
<PAGE>
PART II--OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

    See Note 5 Commitments and Contingencies in Part I, Item 1, Financial
Statements.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

    On November 2, 1999, the Company issued a warrant to acquire up to
2,500 shares of the Company's common stock with an exercise price of $50.375 per
share to Kinka Usher. The issuance of such warrant was exempt from the
registration requirements of the Securities Act of 1933, as amended (the
"Securities Act") pursuant to Section 4(2) thereof.

    On December 6, 1999 the Company issued and sold $150 million principal
amount of 6.25% Convertible Subordinated Notes due December 1, 2004 (the
"Convertible Notes"). The issuance of the Convertible Notes was exempt from the
registration requirements of the Securities Act pursuant to Section 4(2)
thereof.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

    None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

    None.

ITEM 5. OTHER INFORMATION

    None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

    (a) Exhibits

       10.1 Lease dated December 14, 1999 between the Company and Kilroy Realty,
       L.P.

       27.1 Financial Data Schedule

    (b) Reports on Form 8-K

    Current report on Form 8-K dated December 8, 1999 pertaining to the
Company's private placement of $150 million principal amount of
6.25% Convertible Subordinated Notes due December 1, 2004 on December 6, 1999.

                                       33
<PAGE>
                                   SIGNATURES

    Pursuant to the requirements of the Securities Exchange Act of 1934, eToys
Inc. has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

<TABLE>
<S>                                                    <C>  <C>
                                                       ETOYS INC.

                                                       By:             /s/ STEVEN J. SCHOCH
                                                            -----------------------------------------
                                                                         Steven J. Schoch
                                                                    SENIOR VICE PRESIDENT AND
                                                                     CHIEF FINANCIAL OFFICER
</TABLE>

Dated:  February 11, 2000

                                       34
<PAGE>
                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBITS
--------
<S>                     <C>
                        Lease dated December 14, 1999 between the Company and Kilroy
 10.1                     Realty, L.P.

 27.1                   Financial Data Schedule
</TABLE>

                                       35